Do habits generate endogenous fluctuations in a growing economy?

Hyun Park

International Review of Economics & Finance, 2013, vol. 27, issue C, 54-68

Abstract: This article examines endogenous fluctuations under habit persistence in preferences using an otherwise standard one-sector endogenous growth model with fiscal government policies. I show that a continuum of competitive transitional equilibrium paths exists, in conjunction with a globally unique balanced growth path, when a household's preferences are characterized by habit persistence in a growing competitive economy with exogenous fiscal policies, namely, income taxes and productive public spending. Indeterminacy also emerges in the socially efficient second-best allocation even when the government intends to internalize habit externalities, including jealousy and admiration, by introducing optimal time-variant income taxes and public capital services. Therefore, in the presence of multiple competitive equilibria and socially efficient allocations and in the absence of continuous exogenous stochastic shocks, self-fulfilling beliefs drive endogenous business cycles in these growing economies.

Keywords: Habit formation; Indeterminacy; Business cycles; Growing economies (search for similar items in EconPapers)
JEL-codes: D91 E62 H21 O41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:54-68

DOI: 10.1016/j.iref.2012.09.003

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